Oil Hits A 4-Year Low As OPEC Meets, But Which Is The Best Investment: BP plc, Royal Dutch Shell plc Or BG Group plc?

As Brent crude oil futures sink to a four-year low around $76 per barrel, the share prices of some of the biggest oil producers are well down, too.
Historically, the Organisation of the Petroleum Exporting Countries (OPEC) has acted in times of price weakness to cut supplies, thus boosting the price as demand begins to exceed supply. This time, many think Thursday’s planned meeting in Vienna will see the 12-member cartel shy away from such tactics. Nobody knows for sure, but it’s true that OPEC’s influence is less than it once was as some importers diversify there purchases between OPEC…

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As Brent crude oil futures sink to a four-year low around $76 per barrel, the share prices of some of the biggest oil producers are well down, too.

Historically, the Organisation of the Petroleum Exporting Countries (OPEC) has acted in times of price weakness to cut supplies, thus boosting the price as demand begins to exceed supply. This time, many think Thursday’s planned meeting in Vienna will see the 12-member cartel shy away from such tactics. Nobody knows for sure, but it’s true that OPEC’s influence is less than it once was as some importers diversify there purchases between OPEC countries and other big producers such as Russia. Currently, OPEC produces just under half the world’s oil.

Whether the current oil price proves to be a brief dip or something more enduring, right now could be a good time to add an oil company or two to our portfolios in the hope that any future oil price recovery will take these firms’ share prices with it, and that a lower oil price could restrict downside risk in the meantime.

Valuation

On valuation grounds, just considering the numbers, BP looks like a clear winner:

Company

BG Group

Royal Dutch Shell

BP

Share price

1035p

2343p

436p

Forward P/E rating for 2015

15

11

10

Forward earnings’ growth consensus

0%

(4%)

3%

Forward dividend yield

2%

5%

5.8%

Number of times earnings covers dividend

3

1.8

1.7

Price to book value

1.11

0.79

0.6

BP enjoys the lowest forward P/E rating, the highest earnings’ growth forecast for 2015, the highest dividend yield, and trades at the biggest discount to net asset value. Looking at forward prospects could help us understand why that is.

BP’s Prospects

BP has ‘issues’, there’s no doubt about that. Uncertainty surrounds forward earnings’ potential from the firm’s Russian venture with Rosneft following the imposition of Western sanctions on Russia over the Ukraine affair. On top of that, the District Court for the Eastern District of Louisiana has declared BP grossly negligent with respect to the Gulf of Mexico oil blowout accident, opening the door to higher fines under the Clean Water Act — as much as $4,300 per barrel of oil spilled, rather than $1,100 per barrel in the case of ‘simple’ negligence.

That said, I’ve always admired BP’s gargantuan cash-generating ability, which, up until now, has seen the firm through challenging times. Low valuations rarely arrive without good reason, yet any improvement in the outlook for BP could see the shares re-rate upwards, which is the great attraction of a value situation.

Is Shell safer?

Shell’s forward strategy involves asset sales and re-focusing in a plan that seems to emulate BP post its Gulf of Mexico disaster. Shell aims to improve investor returns by concentrating on what it describes as better financial performance, enhanced capital efficiency and strong project delivery. The strategy involves a selective approach to project execution and some $15 billion of divestments occurring during this year and through 2015.

There’s not that much between the valuations of Shell and BP, the main difference is that Shell isn’t recovering from an oil blowout disaster. However, oil exploration and production is a dangerous activity and such operational setbacks can occur at any time, which is a good reason for the firms’ valuations to remain low.

Why is BG Group’s valuation higher?

BG Group is the wild card in the pack because it focuses on gas although, when drilling holes, there’s no certainty about what you’ll get, so the firm handles oil as well. The firm’s exploration success rate seems historically more vibrant than BP’s and Shell’s. BG earns around 60% of its operating profit from upstream operations and 40% from its LNG shipping and marketing business. On the back of several large discoveries, the share price did well over the last few years and the current valuation seems to anticipate further progress.

What now?

Oil and gas exploration is such an uncertain business, and the resource-producing industry so cyclical, that I’m reluctant to pay a valuation premium for previous good form as shown by BG Group.

The most challenged firm right now seems to be BP. That means the valuation is potentially the most compressed. I like the root-and-branch nature of the reforms and restructuring taking place at BP and think the firm has the most potential to bounce back from current woes, potentially delighting shareholders with capital gains in the process, as such, the firm looks attractive.

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Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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